Economist Paul Krugman: Austerity Killing the Euro

Economist Paul Krugman says that austerity measures — not financial mismanagment and overspending — are responsible for putting the euro at death's door.

"Even optimists now see Europe as headed for recession, while pessimists warn that the euro may become the epicenter of another global financial crisis," Krugman writes in the Economic Times. "How did things go so wrong?"

"The answer you hear all the time is that the euro crisis was caused by fiscal irresponsibility."

Paul Krugman
(Getty Images photo)

Turn on your TV and you're very likely to find some pundit declaring that if America doesn't slash spending, the United States will end up like Greece, says Krugman. The truth, he asserts, is nearly the opposite.

"Although Europe's leaders continue to insist that the problem is too much spending in debtor nations, the real problem is too little spending in Europe as a whole," he says.

Krugman notes that during the years of easy money, wages and prices in southern Europe rose substantially faster than in northern Europe.

“This divergence now needs to be reversed, either through falling prices in the south or through rising prices in the north,” says Krugman. “If southern Europe is forced to deflate its way to competitiveness, it will both pay a heavy price in employment and worsen its debt problems,” he says.

“The chances of success would be much greater if the gap were closed via rising prices in the north.”

The New York Times reports that European leaders are working overtime on a tentative deal to try to save the euro, which they hope to complete at a crucial summit meeting in Brussels this week.

Economist Paul Krugman says that austerity measures not financial mismanagment and overspending are responsible for putting the euro at death's door.
Even optimists now see Europe as headed for recession, while pessimists warn that the euro may become the epicenter of...